Index Outlook: Stocks do an about-turn

Sensex (18,240.7)

It was a week of high drama with stocks tumbling en masse on Monday ostensibly due to a Government official expressing discontent at the existing double taxation agreement with Mauritius. As if an agreement that has been in existence for 28 years despite the displeasure of the RBI, SEBI and tax authorities can be done away overnight.

The mood was exactly the reverse on Friday as stocks soared in a dizzying manner with traders scrambling to cover short positions and investors in a mad rush to bottom-fish. The Sensex finally ended the week 2 per cent higher. Monsoon and the ongoing troubles in European economies provided the other sidelights.

Volumes that were sedate through the week suddenly flared up on Friday. Value of contracts traded in the derivative segment neared Rs 2,00,000 crore on Friday. Index put call ratio has now fallen below 1 denoting an oversold market towards weekend. Open interest at around Rs 1,45,000 crore too has not attained alarming proportion yet.

In a sudden change of heart, FIIs who were net sellers through June turned buyers in the last two sessions. According to the BSE, they net purchased shares worth Rs 890 crore on Friday alone. Despite this, they have withdrawn Rs 1,800 crore from the secondary market in June.

The Sensex has covered a lot of ground last week, declining to the intra-week low of 17,314 on Monday and then reversing smartly to Friday's peak of 18,269. Oscillators in the daily chart moved deep in to negative zone and then have reversed to move back to the neutral zone in this period. Weekly oscillators are hovering just below the zero line implying a cautious medium-term stance.

We had been reiterating the medium-term targets at 17,420 and 16,647 over the last many weeks in this column. The Sensex declined below the first target on Monday but recovered intra-day to close at 17,507 in that session.

Let us take a look at the long-term picture and then narrow it down to the short-term. A fairly serious long-term correction is currently in progress that is retracing the entire up-move from March 2009 low. Initial retracement targets for this correction are 17,189, 16,758 and 16,118. The index has been attempting to hold above the first support since the beginning of this year. If it manages to do so, it will have bullish long-term connotations though the index can spend the rest of this year in the band between 17,000 and 21,000.

The medium-term trend is down since April. But this appears to be the minor ‘b' of the B wave of the correction that commenced at 21,108. That means we can have an upward moving minor ‘c' that takes the index higher to 18,600 or even 19,811 again. The counts will, however, be modified if the index fails to move beyond 18,300 next week. That will mean that the B wave ended at 19,811 and the C from 21,108 is in motion currently.

So in the short-term, 18,268, Friday's peak is of utmost importance. This level occurs at 38.2 per cent retracement of the down-move from 19,811 (the magic of Fibonacci again!). Failure to close above this level will drag the index down to 17,304 or even 16,720 in the sessions ahead. Conversely, strong move above 18,267 will pave the way for a rally to 18,562 or 18,857. Supports for the week ahead would be at 17,900 and 17,700.

Nifty (5,471.2)

The Nifty too achieved our first medium-term target last Monday. It declined below 5,224 to record the intra-day low of 5,196 before ending the session at 5,257. We needed an emphatic close below 5,224 to signal that it is heading towards the next medium-term target at 4,989. This bounce from the first target means that the worst could have been averted for the time being.

We will, however, need to watch the level of 5,481 very carefully to decide if the short-term trend has reversed higher. Inability to move above this level will mean that the index can move down to 5,196 or even 5,015 in the ensuing weeks.

On the other hand, close above 5,481 will mean that the index is heading higher to 5,570 or 5,658. Those holding short positions should therefore close their positions if the Nifty appears to be moving strongly above this key resistance at 5,481.

The medium-term trend will reverse higher only on a move above 5,658. Such a move will mean that the index can move to the long-term resistance around 5,900 again.

Global Cues

It was worries on the health of Italian banks coupled with slowing economic growth in the US that pegged global equity markets last week. Most European and US markets closed on a negative note after a strong start to the week. DJ Euro STOXX 50 closed around 2 per cent lower.

It is obvious that the medium-term downtrend that began from the May peak continues to hold sway in the European markets.

Greece that has been at the eye of the storm saw its benchmark hit 13-year low last week.

CBOE Volatility index that had spiked up to 25 in the previous week moved slightly lower though it closed the week at 21.

The Dow was volatile around the important support at 12,000 over the past sessions. This index too continues the down-trend that began in May.

A strong close above 12,500 is needed to mitigate the short-term risk in the index. Else it could slide down towards the next downward target at 11,000.

In contrast, most Asian markets closed on a strong note last week, largely helped by a surge towards the weekend. Shanghai Composite and Nikkei reversed after a prolonged downtrend while others such as the Philippines Composite and KLSE (the Malaysian benchmark) resumed their uptrend.

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